The Institutional Innovation Manifesto

If you want to be a 21st century company (or economy), if you want to survive and thrive during this Great Stagnation, you’ve got to to have the courage, foresight, and determination to step up to a higher rung on the ladder of innovation. It’s time to master what I sometimes call “I-squared”: the art and practice of institutional innovation.

Institutional innovation (magnificently discussed in John Hagel and JSB’s shudderingly awesome Power of Pull) is an arduous, difficult, and frustrating challenge for most — because, all too often, institutions are a little bit like art: the more you try and define them, the more elusive they get. The reason is that they’re culturally bound, socially specific, and, above all, messily human, so reducing them to an entry in Wikipedia is bound to result in disaster. So many can’t get to grips with institutional innovation because, well, they often can’t figure out the blazes the fuss is all about to begin with.

But you know them when see them. So rather than launch into a turgid exegesis of the microstructure of institutions, let’s approach the problem from the outside in: with a few examples.

Here are eight institutions as familiar to you as the air you’re breathing — and, for that reason, just as invisible. All are in dire need of destruction, reimagination, and reinvention. Each is a musty, moldy, and stale, remnant of the industrial age, and each, today, is failing to nourish the economy.

The mall. They’re like little colonies of corpocracy, beamed down from the capitalist mothership, that usually land smack in the middle of what used to be a thriving town square. Let’s face it. Malls are soul-deadening, community-crushing, job-vaporizing, passion-flattening, purpose-destroying, innovation-sucking, future-munching vectors of the lethal disease known as consumer capitalism — the one that’s eating America from the inside out. From an economic perspective, the mall props up overleverage, inefficient businesses, unproductive industries, and stagnant products and services, creating a structural overinvestment in yesterday, and an underinvestment in tomorrow. And for that reason, it’s time to find a cure. Think about it this way: because consumption makes up 70% of the American economy alone, which is the biggest in the world, whomever reinvents the mall to look a lot less like whatever this isand a lot more like a thriving, bustling, collegial town square is going to, in a very real way, literally build a better economy.

The bank. The reason banks blew up, ultimately, is that they weren’t really banks: they were more like giant leveraged structured hedge funds where your deposits were less like precious assets to be safeguarded, and more like casino chips in the sweating, relapsed hands of a Gamblers Anonymous chapter out on a stag night. So for Pete’s sake, will someone create a bank for the rest of us already? If I had to outline its essential elements, I’d say they were local relationships, qualitative knowledge, derivatives that worked for people (not just traders), transparency, and fidelity.

The stock market. Today’s stock markets are a little bit like casinos, and shares are the one-eyed Jacks. Did you make a quick buck, from day-trading furiously, on the latest incendiary rumor? The result, of course, is sharp volatility, divorced from fundamental performance, which dilutes the incentives for managers to, well, manage, in the first place — and which, in turn, leads to cascading transaction costs, inefficiency, and moral hazard. It’s about time someone reinvented a stock market meant for actual investment ; real, committed, long-haul, patient capital — slow money, as the thoroughly awesome Woody Tasch has called it — not just myopic, narrow, by-the-nanosecond, rumor-mill driven speculation. Whoever does is likely to enjoy tsunami of capital pouring in from the growing number of people to whom gambling with their hard-earned cash sounds about as smart as eating a pound of plutonium.

The IPO. The IPO window, venture investors will tell you, has been shut down for the better part of a decade. Here’s a thought: maybe all the above — reckless banks, overinvesting in yesterday, and tuned-out investors swearing allegiance to yesterday — has more than a little to do with why it’s shut. And will stay shut. So instead of hoping, praying, and pleading for it to open, why not reinvent the IPO as we know it? Here’s my guess: whoever can conceptualize a better way for companies to get funded, one that doesn’t require payoffs through the nose to (dis)investment bankers, enough legal paperwork to bury Jupiter, and the persuasion of institutional investors who should probably be institutionalized for all the care they’ve shown towards monitoring the health of the companies they own — well, said innovator probably stands to make a fortune.

The job. Some call this is the Age of the Internet, the Age of China, the Age of Innovation. But above all, we live in the Age of Dilbert. Or, more accurately, we suffer through it. So why can’t we have work that nourishes the mind, body, and soul? Why can’t we have work that’s meaningful and fulfilling, challenging and compelling, riveting and involving? Work that’s not just, well, work, a source of displeasure that pays the bills, but a calling, a mission, a purpose, and a passion, that pays life forward? Here’s my hunch. Whoever does reinvent the job might have finally built a company that’s so relentlessly innovative, so fully engaged, so unshakably persevering that it reduces pretty much everyone else to a distant second place.

The bottom line. We’ve spent decades trying to figure out how to make employees “feel” valued. But we can’t seem to do it. Why not? Perhaps we have to work on stuff of authentic, enduring, and meaningful value first. If all you want to do is maximize near-term profit, well, there’s little meaning or fulfillment in that for anyone, apart from an emotional zombie or a business school grad (just kidding, folks :-)). To get deeper engagement and commitment from people and more loyalty from customers, companies must do things of higher purpose in the first place. And that means rethinking profit itself, and what counts as real profit — and what just counts as ill-gotten gain. Now, here, let me say: I speak not simply of triple bottom lines. What’s not important isn’t whether you have three, thirty, or three hundred bottom lines: what is vital is innovating how to conceptualize doing stuff of more authentic worth.

The corporation. I have a theory. Trying to get the corporation as we know it to ignite 21st century prosperity is a little bit like using a water pistol to try and stop climate change. You can fire away till you’re blue in the face, but the problem probably isn’t going anywhere. It’s a futile act — the industrial age corporation, bound to maximize financial profit, bereft of liability, asymmetrically endowed with the rights of people but not their legal, social, human, and ethical obligations, was a tool built for a very different purpose. But just as problems shape tools, so depending on tools recreates problems. Hence, tomorrow’s most radical innovators are already starting to reinvent the corporation itself, history’s most heavily used organizational form: think forporations and you start to get the picture.

The board. You know how you can always count on your Mom to tell you what you want to hear, instead of what you need to hear (“Dear, you’re not fat — you’re just eating well”)? Well, then consider this. It’s funny, isn’t it, how the boards of most companies are made up of exactly the people that, if you really wanted to hear criticism about what a company wasn’t getting right, are probably least able to give it. Earth to corporate America: it’s a little bit like Kim Jong-Il stacking his inner council with sympathizers. No one ever gained much insight by listening more fervently to their allies. The most piercing criticisms usually come from your adversaries. So here’s my last and most starry-eyed, most heartily absurd proposal: tomorrow’s boards should include them. What might happen if corporations worked not to marginalize activists, renegades, and other assorted critics, but to listen to them, respond to their criticisms and, just maybe, even work with them? Well, then we might have a company that was capable of endogenous improvement — from the inside out — instead of staying numbly, dumbly stuck in yesterday’s threadbare comfort zone.

If we could reimagine a better capitalism, what would we want — and where would we begin? Perhaps because those questions are so big, they feel more than a little bit daunting. But the time to be dauntless is now. Because whether we like it or not, a Great Stagnation is choking us in the belching, noxious fumes of an industrial age, and it won’t go away just because we want it to. But it will when we cause it to.

Hence, the necessity to jump to a higher rung on the ladder of innovation. These, of course, aren’t the only institutions to reimagine, or even the best ones. Far from an exhaustive list, I’ve compiled this crib sheet to give you a better intuition for what institutions are, why they matter – and next time, we’ll begin discussing how to disrupt and rebuild them.

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